The Standing Senate Committee on
National Finance
Issue No. 40 - Evidence - October 4, 2017
OTTAWA, Wednesday, October 4, 2017
The Standing Senate Committee on National Finance met this day at 6:48 p.m. to continue its study on the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Honourable senators, welcome to this meeting of the Standing Senate Committee on National Finance.
[English]
My name is Percy Mockler, senator from New Brunswick and chair of the committee. I wish to welcome all those who are with us in the room and viewers across the country who may be watching on television or online.
As a reminder to those watching, the committee hearings are open to the public and available online at the Senate website at sencanada.ca. All committee-related business can also be found online, including the committee’s special studies, past reports, bills studied and lists of witnesses.
At this time I would like to ask the senators to introduce themselves.
Senator Jaffer: Mobina Jaffer from British Columbia.
[Translation]
Senator Pratte: André Pratte from Quebec.
Senator Bellemare: Diane Bellemare from Quebec.
[English]
Senator Black: Doug Black from Alberta.
[Translation]
Senator Dagenais: Jean-Guy Dagenais from Quebec.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Ataullahjan: Salma Ataullahjan, Ontario.
Senator Cools: Anne Cools from Ontario. Actually, Toronto.
The Chair: Thank you.
Now I would like to recognize the clerk of the committee, Gaëtane Lemay, and our two analysts, Sylvain Fleury and Alex Smith, who team up to support the work of this committee.
Today our committee, mandated by the Senate of Canada, continues its special study on the proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved, changes that the Minister of Finance proposed during the summer.
Yesterday, for your information, officials from the Department of Finance appeared and explained to us the gist of the proposed changes.
[Translation]
Today, we have before us three experts who studied the document that the minister put to public consultation. They were asked to give their opinion on the impacts of the proposed changes.
[English]
We are pleased to welcome this evening Kim G.C. Moody, Director of Canadian Tax Advisory, Moodys Gartner Tax Law LLP; Ian Pryor, Tax Lawyer, Pryor Tax Law; and Michael Wolfson, Adjunct Professor, School of Epidemiology and Public Health and Faculty of Law at the University of Ottawa.
Before I ask the witnesses to make their presentations, to be followed by questions from the senators, I would like to inform senators now as the chair that we will go to an in camera meeting at 8 p.m. to share with you future business of this committee.
I now ask, in this order, Mr. Moody to make his presentation, then Mr. Pryor and then Mr. Wolfson.
[Translation]
Mr. Moody, thank you for being here today. The floor is yours.
[English]
Kim G C Moody, Director, Canadian Tax Advisory, Moodys Gartner Tax Law LLP, as an individual: Thank you very much. It’s a real pleasure to be here to discuss the July 18 proposals. I really appreciate it.
My name is Kim Moody. I’m a tax account with Moodys Gartner Tax Law in Calgary, as was already said. Throughout my career, I have volunteered extensively through various different roles within the tax profession to try to do my small part to help improve the education, dialogue and administration of Canada’s tax system so that it can continue to be one of the best in the world. I’m currently a co-chair of the Joint Committee on Taxation between the Canadian Bar Association and the Chartered Professionals Accountants of Canada. Notwithstanding that the committee just submitted its landmark submissions regarding the proposals on Monday, I want to make it clear that my appearance and remarks today do not represent the views of the joint committee or any of the other associations or foundations that I have had the pleasure of being involved with. Instead, the comments today are mine and mine alone, but they reflect the views of many people with whom I have spoken over the past couple of months.
Canada’s tax system is the envy of many other jurisdictions around the world, in my opinion, because of the general cooperation of all stakeholders, academics, government officials, bureaucrats, the judiciary, tax practitioners and the business community. They all have a vested stake in making sure that the system works.
The experience since July 18, 2017, has been a not-so-great example of what happens when all stakeholders are not involved, either intentionally or otherwise, in the debates and implementation of significant tax policy changes. Canada deserves better than what is being proposed in these proposals. My comments today are broken down in three distinct parts: first, the process of unveiling the July 18 proposals; second, the problems with the proposals themselves; and third, concerns about where we go from here.
First, the process. Where do I start? I have to say that the whole process of unveiling the most significant tax policy changes for private corporations and their shareholders since 1972 has been a lesson in what not to do.
I appreciate that the government suggests that they have been studying these changes since they got elected. From the taxpayers’ perspective, however, it started with the benign announcement and comments in the March 2017 federal budget whereby the government announced it was studying certain aspects of the taxation of private corporations and their shareholders, and those three were income splitting, build up of passive assets and conversion of dividends into capital gains.
I was at the budget lock-up in Ottawa for the 2017 federal budget. That’s a great day for a geek like me. It’s like a kid in a free candy store, where you can gorge yourself with tax material. Many great tax practitioners were there. We all had our guesses as to what the consultation paper would say, but there wasn’t much talk. We were having some guesses and what have you, but really there wasn’t a lot of detail, because all the budget document stated was this:
The Government intends to release a paper in the coming months setting out the nature of these issues in more detail as well as proposed policy responses.
That’s pretty much all it said.
I think it’s fair to say that for the vast majority of tax practitioners, the release and contents of the consultation paper were a complete shock. Let me explain why.
First, for two of the three pillars under study, income splitting and the conversion of dividends into capital gains, draft legislation and explanatory notes were released. Not just a bit of draft legislation, but 27 pages of draft legislation and 47 pages of explanatory notes.
In my world, that’s a lot. In my entire career, I can count on my left hand when draft legislation is released and such legislation that’s not passed materially is released. Releasing draft legislation as the so-called proposed policy response was unexpected. This was not smelling like a consultation.
Number two, the minister’s letter attached to the consultation paper was one of the most shocking displays of arrogance I have seen in my career. Using language like “closing loopholes” to describe existing laws. The use of the populous phrase “fair share,” which in my world is a disguised way of increasing taxes, because there is no such thing as fair share. Everyone needs to comply with the law. No more, no less.
The use of class warfare language in the following statement:
. . . our Government . . . is taking steps to address tax planning strategies and close loopholes that are only available to some — often the very wealthy or the highest income earners — at the expense of others.
That statement is disappointing and in my view unnecessary. In my opinion, this kind of language in the minister’s letter is regretful since it has without doubt contributed to the visible anger that currently exists within the tax and business community. Such language has made people feel that they have been tax cheats, when the reality of it is that the vast majority of small-business owners are simply trying to eke out a living and comply with tax laws. Any good in the proposals was completely fogged out by the language, and understandably since the language was the starting point.
The misleading and aggressive language in the material caused, in my opinion, confusion and a delay in the business community realizing that the proposals were not closing loopholes but instead represented a massive tax policy change.
Number three. Releasing the material on July 18, when much of the business community is either on holidays or trying to enjoy our short Canadian summer. Many people told me that they believed this might have been done on purpose so that Canadians would be caught unaware and unavailable. Many also suggested that this was perhaps a cynical move which might also have led to visible anger within the business community.
Number four, the short 75-day consultation period which just ended on Monday. The last time we had massive tax reform, such changes came out of the so-called Carter commission, which commenced its study in 1964 and released its landmark findings two years later in 1966. After much debate and study, the government implemented the changes into law with many of the recommendations, but not all, coming out of the Carter commission, and with the support of the greater business community because they were involved in the consensus-building exercise at that time.
That was roughly an eight-year period, and such recommendations still form the foundation of our current system. Many people have told me that they do not believe that 75 days is sufficient to undo the long period of study, debate, implementation and practice since 1964. Frankly, I agree.
Number five. We have seen a vigorous defence of the proposals by the minister and his department by way of print and social media. The defence has been a response to what many economists and experts have noted, including me, are valid concerns.
As an example, I reference the Department of Finance’s Twitter account. If you haven’t looked at it, I suggest you should. I have never seen such propaganda being released by them ever. Such a vigorous defence contributes greatly to the cynicism or perhaps reality that the consultation is truly not a consultation.
Number six. Some of the speaking points by the Prime Minister, the minister and other government officials have been very misleading, using the phrase that the proposals only apply to a wealthy few. For example, such proposals will not apply to people with income of less than $150,000. Apparently, there are accusations that a lot of misinformation and scare tactics have been used by tax practitioners such as myself to fear monger.
The truth, however, is that the proposals, as written, will impact virtually all private corporations and their shareholders. There is no fear mongering and spreading of misinformation in this statement. It is a fact. My peers and I are simply stating the truth.
I am happy to defend that truth in separate in-depth conversations because despite our government’s vigorous defence it cannot be clarified in sound bites. Notwithstanding some ridiculous suggestions made by some to simply wind up their private corporations to avoid the proposals, the fact is that private corporations are not used by the vast majority to simply save a deferred tax. There are many valid non-tax reasons to incorporate, not the least of which is creditor protection. Such a suggestion shows a lack of understanding of the proposals, since a simple windup will not avoid all the implications of the income-splitting proposals, as an example.
Finally, a windup is just not that easy. That’s why I support an extended consultation period to explore all the impacts and benefits.
All of these process points — let’s be clear, these are process points — are important for us to reflect on. Why? As I mentioned earlier, the anger amongst the business community and their advisers is real. When the deck chairs are moved with misleading messages, it’s only logical for the front-line stakeholders to react negatively.
Let’s be clear, the front line is not the Department of Finance and certain academics who have never experienced what it’s like to be on the front line. Canadians deserve true engagement with all stakeholders to maintain the envy status of Canada’s taxation system and continue to be attractive to entrepreneurs and investment capital, most especially when there is competition from every corner of the world to invest in their country.
I’ll now move on to the actual proposals themselves. Before I do, it’s important for me to recognize that some of the July 18, 2017, proposals are actually good. But, as earlier mentioned, the process points I have just finished talking about have seriously clouded and tainted any good measures that might exist.
The Chair: I’ll have to inform you that we have two minutes left.
Mr. Moody: That’s bang on. I think it’s fair to say that the draft legislation is some of the most complex and pervasive that I have ever seen. Many of my peers have said the same. The joint committee submissions echo that.
As I mentioned before, most of the small-business community is simply trying to eke out a living. They normally don’t have big budgets to hire tax advisers like myself to help them interpret and apply the law. They are not large corporations with dedicated tax departments. They are simply job creators who care about doing a good job for their customers and hope to reap some financial rewards in their risk taking.
If I was a selfish person, I would shut up and not speak about the complexity of these proposals, since ultimately there will be a larger need for tax specialists like myself to assist business owners and their advisers. However, Canada deserves better and so do the front-line businesses. A tax system that works for all is necessary. When the system becomes too complex, if it fails, compliance costs for CRA spiral, along with taxpayer costs.
These legislative proposals are a step in the wrong direction in trying to simplify Canada’s tax system. The proposals are rife with opportunities for double tax; significant tax increases for all, not just the wealthy few; problems with transition to family business to a person; significant tax increases upon death; retroactive and retrospective taxation; and numerous technical issues that are simply too complex to describe in my short time.
Can the draft legislation simply be tweaked to sandpaper down some of the rough edges? We’ll have to see. If the length and depth of the joint committee submissions are any indication, some 150 pages in total, it will be very difficult to do. In my opinion, the sanding will need to be very significant, not just a few strokes against the grain.
Given my short time, I am going to jump ahead here and suggest that my preference would be that the draft legislation be parked along with the white paper on passive investment. Instead, let’s look at what the good policy objectives of the government are, and let’s involve everybody. Preferably such an engagement would take place with another tax reform like Carter.
Let me close my remarks with some comments and concerns about where we go from here. Some serious harm has occurred in the process we have experienced. A helpful first step by the government would be an acknowledgment that some of the language used in the process was regretful. Such an acknowledgment might help heal some of the wounds and make visible some of the good tax policy objectives the government is trying to implement.
I would recommend that it slow down and do this right.
Overall, I’m concerned for Canada’s entrepreneurial sector. There is an active dialogue that has taken place over the years to encourage the entrepreneurial spirit. I have written about how much capital I have witnessed leave Canada recently as a result of personal tax increases. I can tell you, since July 18, 2017, I have had more requests for meetings than I can actually handle in the short term. I have meetings lined up to early 2018 about how capital is leaving Canada.
The capital involved is not in the thousands or millions of dollars. It’s more than that. All of this is not good for Canada, and ultimately the government should slow down and bring back certainty to our system. Let’s maintain our envious status. Thank you.
Ian Pryor, Tax Lawyer, Pryor Tax Law, as an individual: Good evening, senators. Thank you very much for the opportunity to discuss these proposed tax changes with you tonight.
My name is Ian Pryor. I’m a tax lawyer based here in Ottawa. We also have offices in Toronto. I am regularly asked to speak at professional conferences and seminars, I have published in numerous journals, and I co-authored a textbook for Thomson Reuters entitled Taxation of Trusts and Estates.
As a tax law boutique, our firm has clients all across the country. We have international clients, but a large number of our clients are Canadian private businesses. So I feel I am well positioned to speak to you about the people who are being primarily targeted with these proposals. I’m going to give you feedback, and a lot of the feedback I’ve gotten is not positive.
The Minister of Finance has repeatedly stated that he intends to increase fairness by targeting the wealthy, as Kim has already mentioned. Prime Minister Trudeau recently stated in the House of Commons that he values small businesses and knows they are the heart of growth in this country. However, the proposals put forth do not differentiate along economic lines. They target private corporations, which leads to inconsistent messaging.
The proposals are remarkably complex. They impose punitive tax rates on private corporations and, in my opinion, will have profoundly negative impacts on the small-business landscape and the Canadian economy.
As Kim mentioned, there are some valid policy reasons or issues raised within the proposals. But if the measures are implemented in their current form without significant change, I anticipate far-reaching and unfortunate collateral damage. I keep coming back to the crude analogy of killing a fly with a sledgehammer. I’m going to come back to that again as we proceed.
As tax professionals, we are seeing more anger, anxiety and discontent from our clients and the general public than we have ever seen before. As you’re aware at this point, these proposals have been divided into three categories: income splitting, surplus stripping and passive investments. The draft legislation dealing with income splitting is wildly complex. It has taken us months to try to get a handle on this, and some of us are still working with it. These are the best tax experts in the country.
In my opinion, the complexity is not justified by the expected revenue return if we look at it from a practical perspective. The consultation paper suggests this measure is going to raise somewhere around $250 million. I believe Mr. Wolfson has estimated it closer to $500 million.
If we take a step back and look at Mr. Wolfson’s number, that is still 0.1 per cent of the current annual tax revenue raised in this country. So if this complexity and these rules are introduced, they will be some of the most complex in the act. We’re doing this for 0.1 per cent of our annual tax revenue.
The stated intention is to limit the ability of business owners to pay related parties at lower tax rates. However, the rules include a reasonableness test in respect of dividends, which allows CRA to determine what’s reasonable and appropriate and what’s not. For small businesses, this subjectivity will create an immense amount of uncertainty and places the burden on taxpayers to prove CRA wrong if they disagree. This can only lead to a material increase in audits, appeals and litigation, and I don’t think our system is ready for that.
Included in the income-splitting provision is the introduction of what I would characterize as a penalty for sales of businesses to related parties. This is beyond comprehension to me from a policy perspective. I can’t wrap my head around why this is there.
In the context of the reasonableness test that I’ve just explained to you, it’s not included in this provision. Rather, the proposal dealing with sales amongst family members or related parties denies the availability of the lifetime capital gains exemption, it denies capital gains treatment, and it imposes the highest tax rate on dividends available. In Ontario that’s a 45 per cent rate.
We’re creating situations where you could pay three times more tax by selling your business to a family member than you would by selling it to an arm’s-length party. The obvious result of this is an incentive to sell outside the family. I’m not sure what the policy motive behind something like that would be.
With respect to the surplus-stripping rules, there are valid policy issues here. More specifically, these rules are targeted at specific strategies that have been used to convert income or dividends to capital gains. I would guess that Finance and CRA have seen a drastic rise in these since the personal tax rate went over 50 per cent. We’re at 53.5 per cent in Ontario, and I would suspect that’s the driver behind a lot of the proliferation of these strategies.
Going back to my sledgehammer analogy, in targeting these specific strategies, the current draft will inadvertently result in extraordinarily negative consequences for estates, in particular. The draft essentially removes one of the techniques that we use to mitigate double and triple tax when an individual dies holding shares of a private corporation.
The other surplus-stripping provision that has been introduced is an anti-avoidance provision that, in my humble opinion, is probably the worst drafted provision I have seen in my career. It is so poorly drafted that even amongst the tax community we cannot come to an agreement as to what falls into this provision and what does not.
The proposals targeting passive investments have rightly been receiving quite a bit of coverage. The options put forth by Finance are again complex and, in my opinion, will be extremely hard to administer for both CRA and taxpayers.
I’ve discussed this with some of my accounting colleagues, and the proposals are almost unworkable from a practical perspective if they are to be implemented in their current form. But if we take a step back, workable or not, the proposals, in my opinion, are unwarranted based on the practical realities of small business.
To put this in context, investment income earned in CCPCs — Canadian-controlled private corporations — is already taxed at 50 per cent. That’s one of the highest tax rates personally or corporately in the world. To take the effective rate on investment income up to 73 per cent at the individual level is grossly unfair. It does not foster neutrality, and it leads to great inequality between business owners and everybody else. In fact, there is only one country in the world I know of that has a similar tax rate and that is France. I’m pretty confident that’s not an economy we’re seeking to emulate here in Canada.
Our current system is based on the concept of integration. Integration strives to ensure that the final tax bill is the same whether an individual earns income personally or through a corporation. The mechanics of integration work better in some provinces than others, but that system has held true for almost 40 years now. You’re going to have the same tax rate whether you earn it personally or earn it corporately and take it out. In Ontario, that rate is roughly 53.5 per cent already.
The question that came to my mind when I read these things is if we take a mature and successful business person and ask them if they would take the risk of starting their business today knowing that the government is a majority stakeholder in their business, would they do it again? The government is taking more than half of everything they already earn, and if the proposals are put in place, they’re taking almost three quarters of the investment income they’re earning.
The ability of a shareholder to defer personal tax through the use of a corporation has been identified as an opportunity. It’s been identified as an opportunity to raise revenue to fund spending. This deferral has been sold as unfair by Minister Morneau. However, please understand my point on integration: The tax rate is the same when the money is taken out. It’s 53.5 per cent.
Anyone with any experience in business understands that this deferral is a timing difference. This deferral allows for expansion and reinvestment into the business. It allows them to save for economic downturns like we had in 2008 or rainy days. It allows them to invest in other private businesses; entrepreneurs invest in other entrepreneurs. It allows them to save to make charitable donations. It allows them to save for retirement and invest in the market.
Mr. Morneau recently suggested that tax professionals and some politicians are using scare tactics to misinform the public. Kim has already commented on that, so I won’t provide any further comment on the hypocrisy of that.
If I listen to the comments coming from my colleagues, they won’t accept a punitive rate. They just will not pay a 73 per cent tax. Tax is the cost of doing business, and in order to reduce those costs, they’re going to take steps like firing employees, raising prices, ceasing to invest in other businesses or the market, selling their business — we’ve had people sell their business in advance of what they otherwise would have — closing the business or leaving Canada altogether. As Kim said, we’re talking about significant amounts of capital when they’re thinking about leaving.
I’ve even had foreign investors change their mind about coming to Canada and investing in the Canadian economy because they perceive what’s going on here right now as being a sign of instability and uncertainty.
To close, in the 1971 budget speech, the then Minister of Finance, on behalf of the then Trudeau government, stated that a tax system must not only be fair, it must be seen as fair. As a whole, the package released by Mr. Morneau will introduce an unacceptable amount of uncertainty, will increase complexity, will increase compliance costs, will discourage investment, will encourage capital and skilled individuals to leave Canada, and it poses the risk that taxpayers will lose confidence and respect for our self-assessing tax system because it would be and would be seen as unfair.
Thank you for your time, and I welcome your questions.
The Chair: Thank you. Mr. Wolfson, sir, in the context of 10 minutes.
Michael Wolfson, Adjunct Professor, School of Epidemiology and Public Health and Faculty of Law, University of Ottawa, as an individual: Thank you. Let me thank the committee for this opportunity to comment on the Finance proposals regarding these Canadian-controlled private corporations.
As a general point, whenever a government wants to curtail aggressive or abusive tax planning, which means raising taxes for some, there will be squawks. When those facing the tax increases are among the well-to-do, these squawks will be especially loud. Some of the fact situations I’ve heard point out important technical tax issues and plausible unintended consequences, but as I’m sure senators can appreciate, there has been a great deal of scaremongering, obviously on both sides here.
I want to focus my brief remarks on four questions: Is income sprinkling unfair? Is small business the engine of Canada’s economic growth? Should small businesses be given special tax treatment to accumulate passive income? Finally, how can we know about these topics; do we have the evidence that Parliament and the people of Canada need?
I thank the clerk for having passed around charts, and thanks to your staff for the translations.
Regarding the first question, the unfairness of using income sprinkling, here are some illustrative calculations — the first page — produced by a private sector tax consultancy. These figures compare the income taxes if an individual receives their income simply as a salary with an individual who receives exactly the same income but via a private company, and then in the same year pays it out as dividends to a spouse or, in the highlighted row, to a spouse and two children aged at least 18, none of whom have any other income.
I’m guessing that the first row at $73,000 was put there because of the claims made by Dan Kelly and the Canadian Federation of Independent Business that two thirds of the small businesses have income below $73,000. While not stated explicitly, the implication is that all of these small businesses will be hit and hit hard by the finance minister’s proposals.
For an individual with an income of $220,000, the potential tax savings can exceed $30,000 per year. The more people you have to sprinkle the dividends among, the higher the tax savings.
The Canadian Centre for Policy Alternatives recently published a careful analysis using Statistics Canada’s social policy model. It estimates that almost half of the benefits of income sprinkling, 47 per cent, accrued to the top 5 per cent, those with incomes over $216,000 per year. On the other hand, the bottom 70 per cent, those with incomes below $99,000, had only 3 per cent of the benefits.
My next graph shows the proportion of individuals who own at least a 10 per cent share in these CCPCs, arrayed by income groups. Ninety per cent of individuals had 2011 total incomes of less than $68,800, and well under 10 per cent were owners. Also, some of these middle- and lower-income CCPC owners were the spouses and children of the main CCPC owner. So in terms of their family income, they lived in families with much higher incomes.
It’s pretty clear that CCPCs are disproportionately owned by those in the top 1 per cent, with 2011 incomes of over $163,300 a year.
In the next trio of graphs — the third page — I’ve shown the number of CCPCs from 2001 to 2011 in four provinces for each of three industrial classifications: restaurants, lawyers, and doctors’ offices. The number of restaurant CCPCs has been increasing gradually, but it’s been fairly stable, while lawyer CCPCs have increased quite steadily over the decade in all four provinces.
More dramatic, though, is the number of doctors’ office CCPCs in Ontario in the rightmost graph. In 2005, the Ontario government, as part of the fee negotiation with the OMA, made an obscure change in their corporate law to enable family members of doctors and dentists to own shares in their private companies. This change may have been well hidden from the general public, but it must have been of real benefit to doctors’ and their families’ tax positions, since the number of their CCPCs increased tenfold in the following years.
This change to Ontario’s corporate law enabled high-income doctors who set up CCPCs to save tens of thousands in income taxes and likely had virtually no benefit in terms of real economic growth. Using CCPCs for income sprinkling is unfair both horizontally, between individuals with the same incomes but able and unable to run this income through a company, and vertically by eroding the progressivity of Canada’s income tax system.
Rising income inequality has come to prominence over the past few years with the focus on the income shares of the top 1 per cent. Our analysis in an earlier paper suggested that this degree of inequality is worse than the available statistics indicate, because they fail to account for income received but retained within these private companies. When we pierced the corporate veil and added these hidden incomes to the share of the top 1 per cent in 2011, it increased by one third, and by half for the top tenth of 1 per cent.
Turning to my second point, so far I’ve been referring to CCPCs and the individuals who are their owners, but the vast majority of the public discourse has used the term “small business.” This term evokes positive feelings, which is fine, but it is also associated with claims that small business in Canada is the engine of economic growth and creates most of the jobs.
Digging into the data is a bit tricky, but the general conclusion is that this claim is simply false. To start, the graph, which shows numbers of firms by employment size, shows the number of firms. The number of small firms under five employees is very large at almost a million, while there are only a bit more than 1,000 firms with 500 employees or more.
But how many employees do these firms have? The next graph, employment shares, shows how employment has been distributed across firms of different sizes. While there are about 1,000 times as many firms with 1 to 50 employees as there are firms with greater than 500, they had about the same number of employees overall. Employment in both was quite stable over the time period shown, from 2001 to 2015.
This pattern clearly indicates that small firms did not create any more jobs than the largest firms in the country.
Moreover, employment in smaller firms is much more turbulent than in larger firms. You can tell I spent a lot of time at Statistics Canada, and I’m a bit of a data junkie. I apologize if you’re not really into graphs and statistics. These next two graphs show, first, the gross employment gains and then gross employment losses, in each case by firm size. As firm size increases, the percentage rates of both year-over-year gains and year-over-year losses get smaller.
There has been a great deal of rhetoric in this debate over the Finance proposals that small-business owners need special tax breaks because they take special, indeed, inordinate, risks. As these data show, so are their employees. Further, their employees rarely have special fringe benefits to pay for maternity leave — if they even have any such leave — nor are they typically covered by a workplace pension plan.
Real and productive economic growth depends on innovation and investment, which are inherently risky. But to further economic growth, I don’t think we want Canadian public policy rewarding gamblers or firms with no growth potential.
These points lead to my third question: Why should owners of CCPCs be given special tax treatment to accumulate passive income? Among the reasons cited — and we heard some a few minutes ago — it is to pay for children’s education; to save for maternity leave; to save for retirement; to save for a rainy day; and last but not least, to finance future economic growth. Only the last of these has any merit and then only weakly.
In the case of saving for children’s education or for maternity leave, why should incorporation make it easier for these kinds of savings? As a statistician, I generally don’t like to use anecdotes, but experience shows they’re often far more vivid than statistical data. I have two daughters, working for good salaries in large firms in downtown Toronto, and they both have to save for their maternity leave.
As for saving for retirement, Canada already has very generous provisions for tax assistance through RRSPs, RPPs and TFSAs. There used to be a wide gap in the limits for tax assistance via RRSPs and RPPs, but the RRSP contribution limits were increased significantly decades ago in order to bring them closer to equality for those with a good workplace defined-benefits plan. If you are a CCPC owner and you want to avail yourself of this kind of tax-assisted retirement saving, pay yourself a salary and contribute to an RRSP, or if you want to be really clever, hire an actuary and set up an individual pension plan within your CCPC. Then at higher ages, you can get a tax break on retirement savings, getting toward twice the RRSP limits.
This leaves as the only plausible reason for accumulating passive income within a CCPC in a tax advantage manner encouraging future economic growth. But even in this case, there are serious concerns: How can the income tax system ensure that the tax-deferral advantage of accumulated income taxed at significantly lower rates will actually be targeted to finance real economic growth?
As we saw in one of the earlier charts, small businesses have not, since 2001, been creating a larger amount of employment, but they are riskier.
Another personal anecdote. My son has worked for five different small businesses in the last 10 or so years. He bears major downside risks if these firms fail, but he generally has no claim on the upside benefits if these firms are successful. Why should we especially privilege the risks faced by CCPC owners when they accumulate portfolios that might someday be used for real investment, but often accumulate for reasons that have nothing to do with improving Canada’s economy?
Widespread concerns have been voiced about the Finance proposals adding significant complexity to the Income Tax Act. This is the inevitable result of trying to target a tax break to where it is intended. But why use backdoor provisions of the tax system for these kinds of incentives? To foster small-business innovation, why not consider using the government’s front door, something like the U.S. Small Business Innovation Research program, or gearing government procurement more explicitly to small business using a framework like the technology readiness level?
Let me now turn briefly to my fourth and last point. The first two graphs I showed stop in 2011. When we started our research in 2013, these were the most recent data. It took us two years to assemble the data underlying these results. I am very proud of the fact that our research has allowed to us shine a light, for the first time ever, into this dark corner of Canadian tax policy.
Unfortunately, such new light in the dark corners of the tax system is rare. As the Auditor General concluded in his spring 2015 report, tax-based expenditures:
. . . were not systematically evaluated and the information reported did not adequately support parliamentary oversight.
While Parliament is able to scrutinize every dollar of frontdoor spending by the government, every year in the Main Estimates various backdoor expenditures via tax preferences — or tax-based expenditures, as the AG calls them — are barely even scrutinized once when they are introduced in a budget.
Further, and let me conclude on this point, the analytical capacity of the federal government has been seriously eroded over the past decade. The previous government was notorious for knowing what it wanted to do, regardless of any evidence or analysis, especially when it was contrary. As a result, policy analysis groups within federal government departments have generally withered. It takes less than a year to destroy one of these groups, but up to a decade to recruit and rebuild. I worry that part of the communication problems with these finance proposals may be a reflection that even the Department of Finance, for decades a powerhouse of analytical expertise, has experienced this erosion as well.
Thank you.
The Chair: Thank you, Mr. Wolfson.
Senator Marshall: I have several questions, but I’ll ask the major one first.
We have heard a lot of people talk about the impact that this is going to have on succession planning, so could you give us an overview of what impact it’s going to have and tell us what happens now under the current tax structure and what is going to happen under the proposed?
Mr. Pryor: Let me explain. We talked about double and potentially triple layers of taxation. So if an individual owns shares of a corporation and they die owning those shares, there is a capital gains tax on death for that individual.
Then we go into the corporation. Those shares are in the estate. If the family says, “Look, we want to take all the assets out of that corporation and we are going to wind it up; there is no longer a need,” to liquidate those assets there is a second layer of capital gains tax in the corporation.
Then the third layer of tax is when they take the money out of the corporation and there is tax at dividend rates. So that’s three levels of tax.
Senator Marshall: Is this under —
Mr. Pryor: Our current system. That’s right. So one of the methods we have used to avoid double taxation is referred to commonly as the pipeline. What we have done there — and this has been blessed by CRA for years upon years — is we eliminate or minimize the tax on the dividend taking it out. So we’re left with a capital gains rate on death and potentially a capital gains rate on the liquidation in the corporation.
With the proposals, they have eliminated the ability to use —
Senator Marshall: Just talk about the old one again. What would the effective tax rate be under the current system?
Mr. Pryor: That depends greatly on the level in the corporation.
Senator Marshall: Okay.
Mr. Moody: But if you are to do the pipeline, as Ian said, you would be left with one level of capital gains tax. Let’s call it 25 per cent for rounding. So that would be the best-case scenario.
There is a mitigation provision in the act. For any tax geeks, it’s section 164(6) of the act. If you create a loss within the first taxation year of the estate, you can carry that loss back to the terminal gain and be subject to a level of tax on a dividend in the estate. That would be the mid-range acceptable.
If you did neither of those, then you would be subject to double tax; one tax on the terminal gain, plus the extraction of the dividend, which would be about 60-some per cent.
That’s current law.
Senator Marshall: Okay.
Mr. Moody: What these proposals do is take away that ability to have one level of tax. They take away the best-case scenario.
Now you have the mid-tier, which is the dividend tax, or you have the worst-case scenario. In some cases, it can be a lot more atrocious than that.
Senator Marshall: Okay. Mr. Wolfson, would you like to comment on that?
I do have a question for you, because you were talking about passive income. We had the Department of Finance officials testify here yesterday and somebody mentioned $250 million for the sprinkling. That was the estimated revenues to government should the changes in the sprinkling go ahead.
I was trying to get a handle on how much potential revenues they would raise as a result of the other two initiatives. Passive income is the one that would interest me. You spoke about that in your remarks.
Is there any idea how much that would mean to the federal government if the proposed changes —
Mr. Wolfson: I’m sorry. I don’t know. I read the Finance transcript yesterday, and they said they couldn’t tell you because the proposals weren’t sufficiently precise.
My understanding is that the Parliamentary Budget Officer is looking into this and will make some assumptions and be able to report to you.
Senator Marshall: Do you have an idea of the magnitude? The Department of Finance officials can’t give any number at all. It seems suspicious they can’t give us any number. It seems like it could be in the billions of dollars.
Mr. Wolfson: It could be. As I said at the end of my remarks, I’m concerned about the analytical capacity of the folks involved in these provisions. My research was on the income sprinkling only. Frankly, I was surprised when the discussion paper came out and had the two other things in it as well.
But if you give me time, more than you have as a committee, or wait for the PBO, I think they will have some plausible estimates.
Senator Marshall: When you saw the $250 million for the income sprinkling, did that look like a reasonable amount?
Mr. Wolfson: Yes. Bear in mind that the $250 million, I think, in the discussion paper is federal, whereas the $500 million that I estimated was federal plus provincial. So they are not that far apart.
One has to make a number of assumptions to come up with these numbers.
Senator Marshall: Going back to talk about what happens on death, the section on the changes to section 84.1, is that where those changes are made? Is that the section?
Mr. Pryor: The one we were just talking about?
Senator Marshall: Yes.
Mr. Pryor: That’s one of the two.
Mr. Wolfson: That’s one of them, yes.
Senator Marshall: That’s one of them? What is the other one? I’m trying to follow.
Mr. Pryor: It’s section 246(1).
Senator Marshall: Thank you very much.
Senator Pratte: I have two questions. The first question regards the number of corporations that would be affected by these changes.
Mr. Moody, I think you said that practically all private corporations would be affected, and I think most of your colleagues in your profession say the same thing. The department officials yesterday said that income sprinkling would affect 50,000 small businesses and that passive income would affect between 130,000 and 140,000 corporations. So they are saying that it’s a minority of CCPCs. Who is right?
Mr. Moody: I’ll say I’m right because I’m that arrogant, I guess. But just as a quick example — and I’m on record for saying this — how many of us are going to die? Well, 100 per cent; right? When we die, anybody who owns shares in a private corporation, are the proposals as written going to impact? Absolutely.
Senator Pratte: Yes, but we don’t all own CCPCs.
Mr. Moody: I am saying people that own shares of a private corporation. That was what my comment said. Anybody who owns shares of a private corporation will be impacted by these proposals.
When you narrow the focus down to on a year-by-year basis, for example, income strengthening is only affecting X number of people, and passive, Y number of people. In my view, that’s too narrow a view.
Senator Pratte: The fact is that Professor Wolfson has shown, from what I can see, that CCPCs are mostly owned by wealthy people, and, therefore, mostly wealthy people would be affected.
Mr. Moody: I don’t accept that premise to begin with. I can tell you that I act for a lot of people who own shares of a private corporation that are not wealthy. That’s one of the frustrations I have had with the messaging coming out of the department that it only affects the wealthy few. It doesn’t. It affects anybody who owns shares of a private corporation.
Mr. Pryor: We have a number of very small businesses, ma-and-pa corner store operations, and they operate through a corporation for non-tax reasons; right? There is liability. Liability protection, financing from the bank, being incorporated gives you — it’s an easier battle to get financing from a bank.
Some of these people make very little money, but they might be impacted by income sprinkling. Maybe they pay their wife because their wife works. In one way, shape or form, these proposals will touch almost everybody, if my client base, and those of my colleagues, are any indication. I would suggest they are.
Mr. Wolfson: Let me correct one thing. What I said, and what the data show, is that these are used disproportionately at the high-income level. There are lots of CCPCs and CCPC owners at lower incomes. Also, as I said, the ones at lower incomes may be the spouses or kids.
Furthermore, if it is the mom-and-pop corner store, they are not likely making or saving a lot of tax as a result of this. As Ian said, they may have incorporated not for tax planning reasons but for liability reasons.
The data estimated from the Canadian Centre for Policy Alternatives paper shows 3 per cent of the income-sprinkling benefits are going to the bottom 70 per cent, under $99,000 a year in income. I’m a bit surprised that people would incorporate at all because the costs of incorporation, and doing the annual filing, could be more than the tax savings.
Senator Pratte: Yesterday the Minister of Finance was in the Senate for Question Period, and he indicated areas of changes that he was willing to make. I don’t know if you saw, heard or read that.
I wonder if you think that these changes, if you’re aware of them, are satisfactory, or do you think that there are areas there that could alleviate your concerns? I’m addressing this to Mr. Pryor and Mr. Moody.
Mr. Moody: As I mentioned in my opening remarks, the devil is in the details. Depending on how the smoothing or the sandpapering of the proposals happens, for income sprinkling, for example, there has been some scuttlebutt that if they just draw a bright line at a certain age — let’s just pick a number, say age 24 — and if they pick an age of 24 and go down, the U.S. has that model right now. The largest jurisdiction in the world, frankly, so that’s a good one to copy, generally. That would take away a lot of the concerns vis-à-vis subjectivity, reasonableness test. We would have objectivity.
Frankly, I don’t think you would see a lot of people like Ian and me complaining too much about that kind of change. We would squawk, using my friend’s word, if spouses or common-law partners were still caught up because I think there are good arguments to suggest that we should be able to do that. That would be one.
Setting a de minimis test for the passive investment rules might be another alternative. It might be rough justice. It might be rough around the edges, but perhaps that might be something to think about.
The one I really struggle with is the surplus stripping one because it has such broad implications. I don’t know how they could smooth that out.
Senator Pratte: Chair, may we ask the witnesses, and indeed all witnesses that we will hear, to, if possible, send to the committee their comments once the minister publishes his final proposals? Would you agree to do this?
Mr. Moody: Happy to do that.
The Chair: That’s a very good request. You would be happy to do that through the clerk.
Senator Black: Thank you all for being here. This is tremendously interesting. I want to thank you for the commitment you’re making to Canada because there is no reason you have to do this, as you have pointed out. So I’m very appreciative, and I know my colleagues are as well.
We’re trying to be constructive here, as you all are trying to be constructive. Following up on what Senator Pratte said, today, if the Minister of Finance were to call any of you up, what would you tell him to do with these proposals, recognizing we want to be constructive?
Mr. Moody: Well, I mentioned that in my remarks, senator. Number one, retract the regretful language because that would be a pretty good healing spot for a lot of businesses who feel like tax cheats. That anger in the system is real.
Number two, withdraw it all and start again. Assuming that that doesn’t happen, and there is no will for that, then engage people to really look at what you are trying to get at. Are you trying to get after the doctors, accountants and lawyers? It certainly seems like that. Although I don’t agree with it, if you are, let’s get something that might work on each one of these pillars.
Mr. Pryor: I agree largely with Kim’s comments. We need certainty with the income sprinkling. Kim’s number of 24 I agree with. It’s not something I would have recommended off the hop, but I think it’s something that could quell a lot of the concerns.
On the surplus stripping, it’s an easy fix, but they have to start over. The drafting is pretty poor, in my opinion, but it’s an easy fix. To carve out the estate portion, and the negative impacts on estates, I think that could be done.
On the passive income, Kim and I differ a bit on that. I fear greatly for the economy. I don’t have empirical data to justify it. I’m going strictly from the feedback I’m getting from my clients and the capital that I think and fear is going to leave. That might be the straw that breaks the camel’s back.
Senator Black: What would you do?
Mr. Pryor: I would put that one away.
Senator Black: Thank you.
Mr. Wolfson: First, when I started to get some media attention, I started to get what my friends called love letters. One of them really got to me about using the word “loopholes.” You will see that I haven’t used it at all, and I have stopped referring to that. I appreciate the sensitivity.
I worry that if the government backs away too much, these basic principles of fairness will be lost and nothing might end up getting done; so I feel strongly that some of this should go forward.
On the income sprinkling, which is the area that I have studied the most of these three areas, I disagree. Going to age 24 is a start, but it’s nowhere near enough. I am really concerned about these claims.
My wife gets really ticked off when I read her some of these fragments, that she has been a stay-at-home mom and doesn’t deserve income splitting, while just because somebody is a professional or whatever and is incorporated, they do deserve income splitting. I don’t think so.
Let me just pause there.
Senator Jaffer: Thank you to all three of you for being here at such short notice. You have given us a lot to think about. You are the experts. For me, this is a lot to digest.
There is one thing that you all said, and what I am hearing from people is about the loopholes. People who are saying the people who are benefiting from loopholes and those who have never seen them as loopholes, it’s seen as planning their tax life, planning how they do business.
For me, I am concerned that the minister and his department have put the individual who works, earns a salary, gets maternity benefits, gets benefits, gets a pension, albeit may not get a big salary, but there is a path. Then there is the path of the risk taker, the person who invests money and takes many risks and does not have those benefits.
I’m not crying for that person, but it’s an issue of choices. People have made choices of how they are going to arrange their lives.
In the consultation paper that you have seen, it says that two Canadians — one is an employee and the other is an owner of a corporation — each makes a one-time investment of $100,000 pre-income tax. The corporate owner gets 15 per cent, so 85 per cent, and the employee pays $50,000. It’s left there. It doesn’t show that one invests and the other one has other ideas. Neither is right; neither is wrong. I think to loop the two together and call one a loophole, maybe a tax cheat, has led to this complete discussion becoming very hazy.
I would like the three of you to comment on that.
Mr. Wolfson: The timing of when you pay tax is often considered to be immaterial, but deferral really is a tax advantage. That’s one thing. That’s part of the Finance example.
Another concern I have is that the justification for saying, “We should be able to play with 85-cent dollars inside our corporation while everybody else plays with 50-cent dollars after tax,” is based on these claims that being able to keep that income within the company is good for Canada.
As I said in my prepared remarks, I don’t agree with that. There are a whole bunch of reasons that have been given that I think are completely extraneous: saving for your children’s education or maternity leave.
When it comes to the question of what Canada should be doing to foster real economic growth, there are lots of other things. The tax incentives — I hate to use the metaphor, but it’s often like pushing a string. There are other ways of doing it, and I pointed to two of them that I think would be more effective and more sophisticated and thoughtful: government procurement targeted to the innovative parts of the small-business community and a specific grant program like the one the States has.
I was talking to a friend of mine. He works for a 150-person, high-tech innovative company. That was what he told me. He said, “This stuff with passive income, that’s not what really matters to us.”
Mr. Pryor: I agree with you. I think, like Kim mentioned, the language and the rhetoric have definitely pushed people over the limit. But more than that, it’s the refusal to recognize the risk. As a country, we have to decide. Do we want people taking that risk to start companies and employ people? Michael, that’s why your son has a job. Do we want people doing that, or do we just want everybody to be an employee of the federal government?
I think that’s something we really have to give some thought to because if you’re going to take away the advantages — let’s call it the deferral, because that’s what we’re talking about here with this advantage — it’s a timing issue. We know the tax rate is the same, it’s just, when are you paying your tax? If you’re going to take that away, you’re going to lose people. That’s something that policy-makers and the government have to decide. We are in the private sector, and we have always operated on the assumption that, as a country, we’re encouraging that. Maybe we’re changing.
Senator Jaffer: The deferral is not just to pay for your child’s education, from what I’m hearing and have experienced with small business. It’s not just to pay for things. It’s also to grow your business.
Mr. Pryor: Absolutely.
Senator Jaffer: My fear is if you take these away, how do you grow your business? A business owner will try to save as much to grow the business. If you take away the incentive, then what do you do?
Mr. Pryor: One hundred per cent.
Mr. Moody: I agree with that 100 per cent. I agree with all that Ian said.
I point you to the Department of Finance release that came out yesterday and the quote by Minister Morneau. I find this a bit shocking. It says:
The current tax system is unfair. An incorporated professional —
It is interesting that they say “an incorporated professional.”
— making hundreds of thousands of dollars a year who takes advantage of the current rules could end up paying a lower tax rate than a middle class employee on salary. We are going to fix this . . . .
What? It is impossible to have a lower tax rate than a middle-class employee when you consider the deferral.
Now, is the deferral an advantage, to answer your question? There’s no question it’s an advantage. It’s an advantage on earning passive income, and the calculations and the consultation paper display that there might be an advantage, but when you actually take a more thorough look at it, it’s actually a disadvantage in Canada, especially because we’re under-integrated. If I had more time, I would talk to you about that.
When you take this example which was in the press release yesterday, that is just a shocking, misleading comparison of reality, because when that money comes out of the corporation, it’s at the same rate, or when you die or become a non-resident of Canada.
The Chair: Mr. Wolfson, do you want to make a comment?
Mr. Wolfson: Quickly, if I may. Is that referring to passive income or to sprinkling?
Mr. Moody: It’s not referring to anything. Just read it.
Mr. Wolfson: In sprinkling, it is possible, as the examples I showed earlier are there. If you’re an incorporated professional and you can split your income with a spouse and a couple of kids over 18 who have no other income, you pay tax at a lower rate than folks with much lower incomes. It’s easy to construct these examples.
Mr. Moody: I don’t want to get into an argument with you, but I’ll tell you, hundreds of thousands of dollars, you would have to have 15 kids.
Mr. Wolfson: Forty thousand dollars each kid, four kids.
The Chair: That can be another debate. We’ll stick with the mandate we have received from the Senate of Canada.
[Translation]
Senator Bellemare: I had a few questions, but given the time, I’m going to ask you a specific question related to a comment you made, Mr. Moody. You said you were very glad that the Senate was conducting these consultations under the current circumstances. Which other experts do you think we should speak with? Are there particular groups we should make sure we hear from? That question is for all of you because I realize that we are dealing with a very complex subject that involves income inequality. The objective is to reduce the inequality, and the government has taken steps to achieve that, but perhaps you have other suggestions. As part of the committee’s consultations, should we meet with other individuals or groups to ensure we get a clear sense of the big picture?
[English]
Mr. Wolfson: I’m sure you have a good list of people who are tax professionals. It is certainly important for the committee to understand the technical tax aspects, but I would also encourage the committee, if it’s not already in your plans, to hear from some economists to talk about just what these patterns of growth in the economy are. What are the determinants? What has been the effect of the small-business deduction?
I don’t know that you want to get into challenging that — that may be too large — but there are a number of prominent economists from right and left who say get to rid of the small-business deduction, for example, and to try to understand the effect of the tax system. What do we know? How do we know what the effects of these different provisions are on that key thing, which is encouraging entrepreneurship and economic growth? I don’t think that the provisions that are being proposed to be constrained are necessarily or by any stretch close to the most effective ones to achieve that objective.
[Translation]
Senator Bellemare: In any case, I’m sure the committee would welcome your suggestions, if you had any names to propose.
Mr. Wolfson: Yes, I can suggest some names.
[English]
Mr. Moody: I would agree that some economists, such as Jack Mintz, for example, would be very helpful. There are a lot of tax experts, so I won’t give you specific names, unless you want them. Other people, like organizations that have been actively engaged, like the organization that came out the other day, the Business Council of Canada that includes some of the Who’s Who names in Canadian business, I encourage you to seek them. I will be happy to share that with you.
The Chair: The question was: Can you provide —
Mr. Moody: The answer is yes, I will.
Mr. Wolfson: I would also have the Canadian Nurses Association and doctors who are in support of the proposal.
The Chair: Senator Andreychuk, and then on second round we have Senator Pratte and Senator Black to ask their questions, and the witnesses could send us information on the specific questions you have before we go in camera.
Senator Andreychuk: I apologize for coming late, but I was involved with a bill that was being passed. It was passed, so I’m feeling content about that, and I don’t feel as guilty about missing the first part. Perhaps you’ve touched on it.
We want to encourage risk. I sit on the Foreign Affairs Committee and we talk about encouraging entrepreneurial spirit and what that means. The feedback is always that Canadians are risk-averse, and that permeates, I think, national entrepreneurs as well as those who want to go international. So you weigh risk against what? That’s what I haven’t heard. It’s the security. When I was coming out of school, you could go off on your own and start your own business or think of the civil service because you’re going to get security of tenure there.
I haven’t seen fairness defined in other than income. That’s really troublesome that I’m hearing from people saying, “I could have taken a more secure route, maybe made less money.” It isn’t just the person taking the risk. It’s a family. I was a family court judge. When a business is in trouble, the husband is in trouble, the wife is, the children and the extended family. Risk has a lot of definitions, and security has a lot of definitions, and I haven’t heard anyone address those two objects. Perhaps it’s not your field, but it’s what I’m thinking of.
The other one is farming. It’s a very risky business for a lot of factors that are totally beyond the control of the farm. You can have the specialties all you want, but the weather and international markets can conspire against you. I don’t see it as income sprinkling. It’s the security to have a commodity like agriculture, proper products for the farm, continue to be in the hands of people who care about the land and about the family life. I guess that’s what I struggle with.
What about succession? There are too many young kids leaving the farms. How do you look at succession in something like a family on a farm when you take away the income sprinkling?
Mr. Wolfson: Let me just respond to your first one about risk and security or risk and reward. I didn’t put it in precisely those words, but I think the data I presented did show that there are a lot of employees who face a lot of risk. It’s not just the people who are entering into business who are facing the risks.
I don’t want to say we’re living in a bubble here in Ottawa with the federal public service, but the data I showed are for all of Canada, not for public servants or people who work for big banks, and they do experience risk as well. They have the downside risk. The company that my son worked for did go bust, one of them. He had to look for another job. So he did bear the risk. That part I think needs to be balanced.
The phrase is frequently “risk and reward.” The question being asked is how do we ensure that the upside benefits are appropriate for the risk that was taken? I guess this just gets into the whole passive income thing. I worry that it’s not well targeted, the way things are now. That’s part of the issue.
Mr. Moody: I think to compare employees’ risk to business owners’ risk or farmers’ risk is, in my respectful opinion, nonsensical. Until you’re a front-line person experiencing that risk, you really don’t understand it. Thankfully, the Income Tax Act over the years and the tax policy people who have crafted it understand it and have developed deferrals, for example, corporate rates lower than personal rates to allow for that risk mitigation.
That’s been one of the real problems of this paper. Their definition of “fairness” is just not right, in my view. That’s number one.
The second, I share your concern about family succession issues, farming and non-farming. So yes, I definitely concur with those concerns.
Mr. Pryor: Absolutely. I agree with Kim’s comments. The farms have definitely been identified as at more risk than most because of the transitional issues and because a lot of the children are leaving the farm. Most of us feel the farms are an important part of Canadian society.
The same risks or the same issues are faced by all other businesses, but the farms are particularly susceptible to the issues we’re dealing with here, whether it be an intergenerational transfer while they’re alive or on death, because these rules target both.
Senator Marshall: The witnesses can respond later in writing, but the government has on its website the next steps that they’re going to take following five key principles. Could the witnesses follow up in writing and give us their views on those five?
The Chair: Do you agree, witnesses?
Mr. Moody: Yes.
Senator Pratte: One thing I’ve certainly heard and read a lot about in submissions, and I think Mr. Moody alluded to it, is whatever happens to those proposals, the need for an in-depth examination of the Income Tax Act, its complexity, maybe the whole idea of what fairness is and so on. Could you send us some thoughts about this need for a thorough examination of the Income Tax Act and what should such an examination look at and what kinds of topics and form it should take?
Mr. Moody: I’m happy to do that. I’m sure Ian would be happy to do that.
Briefly, I will say the positive thing that has come out of this whole debate and controversy over the last few months is to highlight this particular issue. The professions have been asking for and demanding a comprehensive review for at least 10 years, if not more.
Senator Pratte: Thank you.
Senator Black: My point was identical to Senator Pratte’s. I would also like you to comment on whether you think it has value, a new royal commission as we had decades ago, to analyze the complete taxation system in Canada. I am interested in your view on that.
Lastly, could you each send us a paragraph please that tells us, in your view, the effects the existing proposals would have on innovation and innovators in Canada?
The Chair: Witnesses, thank you very much for being here. Before we table the Finance Committee report to the Senate of Canada, do not hesitate to add and send through the clerk any further comments.
With this, honourable senators, we will go in camera.
(The committee continued in camera.)